Title i Organization and Function of the Bureau of Internal Revenue

8/10/2019 Title i Organization and Function of the Bureau of Internal Revenue

1/217

TITLE I ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL

REVENUE

SECTION 1. Title of the Code.- This Code shall be known as the National Internal Revenue

Code of 1997.

SEC. 2. Powers and duties of the Bureau of Internal Revenue. - The Bureau of Internal

Revenue shall be under the supervision and control of the Department of Finance and its powers

and duties shall comprehend the assessment and collection of all national internal revenue taxes,fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected

therewith, including the execution of judgments in all cases decided in its favor by the Court of

Tax Appeals and the ordinary courts. The Bureau shall give effect to and administer the

supervisory and police powers conferred to it by this Code or other laws.

SEC. 3. Chief Officials of the Bureau of Internal Revenue. - The Bureau of Internal Revenueshall have a chief to be known as Commissioner of Internal Revenue, hereinafter referred to as

the Commissioner and four (4) assistant chiefs to be known as Deputy Commissioners.

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The

power to interpret the provisions of this Code and other tax laws shall be under the exclusive and

original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other

charges, penalties imposed in relation thereto, or other matters arising under this Code or other

laws or portions thereof administered by the Bureau of Internal Revenue is vested in theCommissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, andTake Testimony of Persons. - In ascertaining the correctness of any return, or in making a

return when none has been made, or in determining the liability of any person for any internalrevenue tax, or in collecting any such liability, or in evaluating tax compliance, the

Commissioner is authorized:

(A) To examine any book, paper, record, or other data which may be relevant or material to

such inquiry;

(B) To Obtain on a regular basis from any person other than the person whose internalrevenue tax liability is subject to audit or investigation, or from any office or officer of the

national and local governments, government agencies and instrumentalities, including theBangko Sentral ng Pilipinas and government-owned or -controlled corporations, anyinformation such as, but not limited to, costs and volume of production, receipts or sales and

gross incomes of taxpayers, and the names, addresses, and financial statements of

corporations, mutual fund companies, insurance companies, regional operating headquartersof multinational companies, joint accounts, associations, joint ventures of consortia and

registered partnerships, and their members;


2/217

(C) To summon the person liable for tax or required to file a return, or any officer or

employee of such person, or any person having possession, custody, or care of the books of

accounts and other accounting records containing entries relating to the business of theperson liable for tax, or any other person, to appear before the Commissioner or his duly

authorized representative at a time and place specified in the summons and to produce such

books, papers, records, or other data, and to give testimony;

(D) To take such testimony of the person concerned, under oath, as may be relevant or

material to such inquiry; and (TPI- third party information)

doctrine of willful blindness not included in tax 1 though, Gloria Kintanar case.

(E) To cause revenue officers and employees to make a canvass from time to time of any

revenue district or region and inquire after and concerning all persons therein who may be

liable to pay any internal revenue tax, and all persons owning or having the care,management or possession of any object with respect to which a tax is imposed.

The provisions of the foregoing paragraphs notwithstanding, nothing in this Section shall beconstrued as granting the Commissioner the authority to inquire into bank deposits other than as

provided for in Section 6(F) of this Code.

SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional

Requirements for Tax Administration and Enforcement.-

(A) Examination of Returns and Determination of Tax Due. - After a return has been filed as

required under the provisions of this Code, the Commissioner or his duly authorized

representative may authorize the examination of any taxpayer and the assessment of the correct

amount of tax: Provided, however; That failure to file a return shall not prevent theCommissioner from authorizing the examination of any taxpayer. The tax or any deficiency tax

so assessed shall be paid upon notice and demand from the Commissioner or from his dulyauthorized representative.

Any return, statement of declaration filed in any office authorized to receive the same shall notbe withdrawn: Provided, That within three (3) years from the date of such filing , the same may

be modified, changed, or amended: Provided, further, That no notice for audit or investigation of

such return, statement or declaration has in the meantime been actually served upon the taxpayer.

(B) Failure to Submit Required Returns, Statements, Reports and other Documents. - When a

report required by law as a basis for the assessment of any national internal revenue tax shall notbe forthcoming within the time fixed by laws or rules and regulations or when there is reason tobelieve that any such report is false, incomplete or erroneous, the Commissioner shall assess the

proper tax on the best evidence obtainable. (based on available evidence the commissioner may

apply)

In case a person fails to file a required return or other document at the time prescribed by law, or

willfully or otherwise files a false or fraudulent return or other document, the Commissioner


3/217

shall make or amend the return from his own knowledge and from such information as he can

obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all

legal purposes.

(C) Authority to Conduct Inventory-taking, surveillance and to Prescribe Presumptive Gross

Sales and Receipts. - The Commissioner may, at any time during the taxable year, orderinventory-taking of goods of any taxpayer as a basis for determining his internal revenue tax

liabilities, or may place the business operations of any person, natural or juridical, under

observation or surveillance if there is reason to believe that such person is not declaring hiscorrect income, sales or receipts for internal revenue tax purposes. The findings may be used as

the basis for assessing the taxes for the other months or quarters of the same or different taxable

years and such assessment shall be deemed prima facie correct.

When it is found that a person has failed to issue receipts and invoices in violation of the

requirements of Sections 113 and 237 of this Code, or when there is reason to believe that the

books of accounts or other records do not correctly reflect the declarations made or to be made in

a return required to be filed under the provisions of this Code, the Commissioner, after takinginto account the sales, receipts, income or other taxable base of other persons engaged in similar

businesses under similar situations or circumstances or after considering other relevantinformation may prescribe a minimum amount of such gross receipts, sales and taxable base, and

such amount so prescribed shall be prima facie correct for purposes of determining the internal

revenue tax liabilities of such person.

(D) Authority to Terminate Taxable Period. _ When it shall come to the knowledge of the

Commissioner that a taxpayer is retiring from business subject to tax, or is intending to leave the

Philippines or to remove his property therefrom or to hide or conceal his property, or isperforming any act tending to obstruct the proceedings for the collection of the tax for the past or

current quarter or year or to render the same totally or partly ineffective unless such proceedingsare begun immediately, the Commissioner shall declare the tax period of such taxpayerterminated at any time and shall send the taxpayer a notice of such decision, together with a

request for the immediate payment of the tax for the period so declared terminated and the tax

for the preceding year or quarter, or such portion thereof as may be unpaid, and said taxes shallbe due and payable immediately and shall be subject to all the penalties hereafter prescribed,

unless paid within the time fixed in the demand made by the Commissioner.

(E) Authority of the Commissioner to Prescribe Real Property Values. - The Commissioner is

hereby authorized to divide the Philippines into different zones or areas and shall, upon

consultation with competent appraisers both from the private and public sectors, determine the

fair market value of real properties located in each zone or area. For purposes of computing anyinternal revenue tax, the value of the property shall be, whichever is the higher of;

(1) the fair market value as determined by the Commissioner, or

(2) the fair market value as shown in the schedule of values of the Provincial and CityAssessors.


4/217

(F) Authority of the Commissioner to inquire into Bank Deposit Accounts. - Notwithstanding

any contrary provision of Republic Act No. 1405 and other general or special laws, the

Commissioner is hereby authorized to inquire into the bank deposits of:

(1) a decedent to determine his gross estate; and

(2) any taxpayer who has filed an application for compromise of his tax liability under Sec.

204 (A) (2) of this Code by reason of financial incapacity to pay his tax liability.

In case a taxpayer files an application to compromise the payment of his tax liabilities on his

claim that his financial position demonstrates a clear inability to pay the tax assessed, hisapplication shall not be considered unless and until he waives in writing his privilege under

Republic act NO. 1405 or under other general or special laws, and such waiver shall constitute

the authority of the Commissioner to inquire into the bank deposits of the taxpayer.

(G) Authority to Accredit and Register Tax Agents. - The Commissioner shall accredit and

register, based on their professional competence, integrity and moral fitness, individuals andgeneral professional partnerships and their representatives who prepare and file tax returns,statements, reports, protests, and other papers with or who appear before, the Bureau for

taxpayers. Within one hundred twenty (120) days from January 1, 1998, the Commissioner shall

create national and regional accreditation boards, the members of which shall serve for three (3)years, and shall designate from among the senior officials of the Bureau, one (1) chairman andtwo (2) members for each board, subject to such rules and regulations as the Secretary of Finance

shall promulgate upon the recommendation of the Commissioner.

Individuals and general professional partnerships and their representatives who are denied

accreditation by the Commissioner and/or the national and regional accreditation boards may

appeal such denial to the Secretary of Finance, who shall rule on the appeal within sixty (60)days from receipt of such appeal. Failure of the Secretary of Finance to rule on the Appeal within

the prescribed period shall be deemed as approval of the application for accreditation of the

appellant.

(H) Authority of the Commissioner to Prescribe Additional Procedural or Documentary

Requirements. - The Commissioner may prescribe the manner of compliance with anydocumentary or procedural requirement in connection with the submission or preparation of

financial statements accompanying the tax returns.

SEC. 7. - Authority of the Commissioner to Delegate Power. - The Commissioner may

delegate the powers vested in him under the pertinent provisions of this Code to any or such

subordinate officials with the rank equivalent to a division chief or higher, subject to such

limitations and restrictions as may be imposed under rules and regulations to be promulgated bythe Secretary of finance, upon recommendation of the Commissioner: Provided, However, That

the following powers of the Commissioner shall not be delegated:

(a) The power to recommend the promulgation of rules and regulations by the Secretary of

Finance;


5/217

(b) The power to issue rulings of first impression or to reverse, revoke or modify any

existing ruling of the Bureau;

(c) The power to compromise or abate, under Sec. 204 (A) and (B) of this Code, any tax

liability: Provided, however, That assessments issued by the regional offices involving basic

deficiency taxes of Five hundred thousand pesos (P500,000) or less, and minor criminalviolations, as may be determined by rules and regulations to be promulgated by the

Secretary of finance, upon recommendation of the Commissioner, discovered by regional

and district officials, may be compromised by a regional evaluation board which shall becomposed of the Regional Director as Chairman, the Assistant Regional Director, the heads

of the Legal, Assessment and Collection Divisions and the Revenue District Officer having

jurisdiction over the taxpayer, as members; and

(d) The power to assign or reassign internal revenue officers to establishments where

articles subject to excise tax are produced or kept.

SEC. 8. Duty of the Commissioner to Ensure the Provision and Distribution of forms,Receipts, Certificates, and Appliances, and the Acknowledgment of Payment of Taxes.-

(A) Provision and Distribution to Proper Officials. - It shall be the duty of the

Commissioner, among other things, to prescribe, provide, and distribute to the properofficials the requisite licenses internal revenue stamps, labels all other forms, certificates,bonds, records, invoices, books, receipts, instruments, appliances and apparatus used in

administering the laws falling within the jurisdiction of the Bureau. For this purpose,

internal revenue stamps, strip stamps and labels shall be caused by the Commissioner to beprinted with adequate security features.Internal revenue stamps, whether of a bar code or

fuson design, shall be firmly and conspicuously affixed on each pack of cigars and

cigarettes subject to excise tax in the manner and form as prescribed by the Commissioner,upon approval of the Secretary of Finance.

(B) Receipts for Payment Made. - It shall be the duty of the Commissioner or his dulyauthorized representative or an authorized agent bank to whom any payment of any tax is

made under the provision of this Code to acknowledge the payment of such tax, expressing

the amount paid and the particular account for which such payment was made in a form andmanner prescribed therefor by the Commissioner.

SEC. 9. - Internal Revenue Districts. - With the approval of the Secretary of Finance, the

Commissioner shall divide the Philippines into such number of revenue districts as may formtime to time be required for administrative purposes. Each of these districts shall be under the

supervision of a Revenue District Officer.

SEC. 10. - Revenue Regional Director. - Under rules and regulations, policies and standards

formulated by the Commissioner, with the approval of the Secretary of Finance, the Revenue

Regional director shall, within the region and district offices under his jurisdiction, amongothers:


6/217

(a) Implement laws, policies, plans, programs, rules and regulations of the department or

agencies in the regional area;

(b) Administer and enforce internal revenue laws, and rules and regulations, including the

assessment and collection of all internal revenue taxes, charges and fees.

(c) Issue Letters of authority for the examination of taxpayers within the region;

(d) Provide economical, efficient and effective service to the people in the area;

(e) Coordinate with regional offices or other departments, bureaus and agencies in the area;

(f) Coordinate with local government units in the area;

(g) Exercise control and supervision over the officers and employees within the region; and

(h) Perform such other functions as may be provided by law and as may be delegated by theCommissioner.

SEC. 11. Duties of Revenue District Officers and Other Internal Revenue Officers. - It shall

be the duty of every Revenue District Officer or other internal revenue officers and employees to

ensure that all laws, and rules and regulations affecting national internal revenue are faithfullyexecuted and complied with, and to aid in the prevention, detection and punishment of frauds of

delinquencies in connection therewith.It shall be the duty of every Revenue District Officer to

examine the efficiency of all officers and employees of the Bureau of Internal Revenue under his

supervision, and to report in writing to the Commissioner, through the Regional Director, anyneglect of duty, incompetency, delinquency, or malfeasance in office of any internal revenue

officer of which he may obtain knowledge, with a statement of all the facts and any evidencesustaining each case.

SEC. 12. Agents and Deputies for Collection of National Internal Revenue Taxes. - The

following are hereby constituted agents of the Commissioner:

(a) The Commissioner of Customs and his subordinates with respect to the collection of

national internal revenue taxes on imported goods;

(b) The head of the appropriate government office and his subordinates with respect to the

collection of energy tax; and

(c) Banks duly accredited by the Commissioner with respect to receipt of payments internalrevenue taxes authorized to be made thru bank.

Any officer or employee of an authorized agent bank assigned to receive internal revenue taxpayments and transmit tax returns or documents to the Bureau of Internal Revenue shall be

subject to the same sanctions and penalties prescribed in Sections 269 and 270 of this Code.


7/217

SEC. 13. - Authority of a Revenue Offices. - subject to the rules and regulations to be

prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a Revenue

Officer assigned to perform assessment functions in any district may, pursuant to a Letter ofAuthority issued by the Revenue Regional Director, examine taxpayers within the jurisdiction of

the district in order to collect the correct amount of tax, or to recommend the assessment of any

deficiency tax due in the same manner that the said acts could have been performed by theRevenue Regional Director himself.

SEC. 14. Authority of Officers to Administer Oaths and Take Testimony. - TheCommissioner, Deputy Commissioners, Service Chiefs, Assistant Service Chiefs, Revenue

Regional Directors, Assistant Revenue Regional Directors, Chiefs and Assistant Chiefs of

Divisions, Revenue District Officers, special deputies of the Commissioner, internal revenue

officers and any other employee of the Bureau thereunto especially deputized by theCommissioner shall have the power to administer oaths and to take testimony in any official

matter or investigation conducted by them regarding matters within the jurisdiction of the

Bureau.

SEC. 15. Authority of Internal Revenue Officers to Make Arrests and Seizures. - The

Commissioner, the Deputy Commissioners, the Revenue Regional Directors, the RevenueDistrict Officers and other internal revenue officers shall have authority to make arrests and

seizures for the violation of any penal law, rule or regulation administered by the Bureau of

Internal Revenue. Any person so arrested shall be forthwith brought before a court, there to be

dealt with according to law.

SEC. 16. Assignment of Internal Revenue Officers Involved in Excise Tax Functions to

Establishments Where Articles subject to Excise Tax are Produced or Kept. - TheCommissioner shall employ, assign, or reassign internal revenue officers involved in excise tax

functions, as often as the exigencies of the revenue service may require, to establishments orplaces where articles subject to excise tax are produced or kept: Provided, That an internalrevenue officer assigned to any such establishment shall in no case stay in his assignment for

more than two (2) years, subject to rules and regulations to be prescribed by the Secretary of

Finance, upon recommendation of the Commissioner.

SEC. 17. Assignment of Internal Revenue Officers and Other Employees to Other Duties.-

The Commissioner may, subject to the provisions of Section 16 and the laws on civil service, aswell as the rules and regulations to be prescribed by the Secretary of Finance upon the

recommendation of the Commissioner, assign or reassign internal revenue officers and

employees of the Bureau of Internal Revenue, without change in their official rank and salary, to

other or special duties connected with the enforcement or administration of the revenue laws asthe exigencies of the service may require: Provided, That internal revenue officers assigned to

perform assessment or collection function shall not remain in the same assignment for more than

three (3) years; Provided, further, That assignment of internal revenue officers and employees of

the Bureau to special duties shall not exceed one (1) year.

SEC. 18. Reports of violation of Laws.- When an internal revenue officer discovers evidenceof a violation of this Code or of any law, rule or regulations administered by the Bureau of


8/217

Internal Revenue of such character as to warrant the institution of criminal proceedings, he shall

immediately report the facts to the Commissioner through his immediate superior, giving the

name and address of the offender and the names of the witnesses if possible: Provided, That inurgent cases, the Revenue Regional director or Revenue District Officer, as the case may be, may

send the report to the corresponding prosecuting officer in the latter case, a copy of his report

shall be sent to the Commissioner.

SEC. 19. Contents of Commissioner's Annual Report. - The annual Report of the

Commissioner shall contain detailed statements of the collections of the Bureau withspecifications of the sources of revenue by type of tax, by manner of payment, by revenue region

and by industry group and its disbursements by classes of expenditures.

In case the actual collection exceeds or falls short of target as set in the annual national budget byfifteen percent (15%) or more, the Commissioner shall explain the reason for such excess or

shortfall.

SEC. 20. Submission of Report and Pertinent Information by the Commissioner.

(A) Submission of Pertinent Information to Congress. - The provision of Section 270 of this

Code to the contrary notwithstanding, the Commissioner shall, upon request of Congress

and in aid of legislation, furnish its appropriate Committee pertinent information includingbut not limited to: industry audits, collection performance data, status reports in criminalactions initiated against persons and taxpayer's returns: Provided, however, That any return

or return information which can be associated with, or otherwise identify, directly or

indirectly, a particular taxpayer shall be furnished the appropriate Committee of Congressonly when sitting in Executive Session Unless such taxpayer otherwise consents in writing

to such disclosure.

(B) Report to Oversight Committee. - The Commissioner shall, with reference to Section

204 of this Code, submit to the Oversight Committee referred to in Section 290 hereof,

through the Chairmen of the Committee on Ways and Means of the Senate and House ofRepresentatives, a report on the exercise of his powers pursuant to the said section, every six

(6) months of each calendar year.

SEC. 21. Sources of Revenue.- The following taxes, fees and charges are deemed to be national

internal revenue taxes:

(a) Income tax;

(b) Estate and donor's taxes;

(c) Value-added tax;

(d) Other percentage taxes;

(e) Excise taxes;


9/217

(f) Documentary stamp taxes; and

(g) Such other taxes as are or hereafter may be imposed and collected by the Bureau ofInternal Revenue.

>

TITLE II TAX ON INCOME

CHAPTER VII - ALLOWABLE DEDUCTIONS - A

SEC. 34. Deductions from Gross Income.- Except for taxpayers earning compensation income

arising from personal services rendered under an employer-employee relationship where nodeductions shall be allowed under this Section other than under subsection (M) hereof, in

computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B)and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;

(A) Expenses.-

(1) Ordinary and Necessary Trade, Business or Professional Expenses.-

(a) In General. - There shall be allowed as deduction from gross income all the ordinary

and necessary expenses paid or incurred during the taxable year in carrying on or which

are directly attributable to, the development, management, operation and/or conduct ofthe trade, business or exercise of a profession, including:

(i) A reasonable allowance for salaries, wages, and other forms of compensationfor personal services actually rendered, including the grossed-up monetary value of

fringe benefit furnished or granted by the employer to the employee: Provided,

That the final tax imposed under Section 33 hereof has been paid;

(ii) A reasonable allowance for travel expenses, here and abroad, while away from

home in the pursuit of trade, business or profession;

(iii) A reasonable allowance for rentals and/or other payments which are requiredas a condition for the continued use or possession, for purposes of the trade,business or profession, of property to which the taxpayer has not taken or is not

taking title or in which he has no equity other than that of a lessee, user or

possessor;

(iv) A reasonable allowance for entertainment, amusement and recreation expenses

during the taxable year, that are directly connected to the development,
http://www.bir.gov.ph/index.php/tax-code.html#outlinehttp://www.bir.gov.ph/index.php/tax-code.html#outlinehttp://www.bir.gov.ph/index.php/tax-code.html#outline


10/217

management and operation of the trade, business or profession of the taxpayer, or

that are directly related to or in furtherance of the conduct of his or its trade,

business or exercise of a profession not to exceed such ceilings as the Secretary ofFinance may, by rules and regulations prescribe, upon recommendation of the

Commissioner, taking into account the needs as well as the special circumstances,

nature and character of the industry, trade, business, or profession of the taxpayer:Provided, That any expense incurred for entertainment, amusement or recreationthat is contrary to law, morals public policy or public order shall in no case be

allowed as a deduction.

(b) Substantiation Requirements. - No deduction from gross income shall be allowed

under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient

evidence, such as official receipts or other adequate records: (i) the amount of theexpense being deducted, and (ii) the direct connection or relation of the expense being

deducted to the development, management, operation and/or conduct of the trade,

business or profession of the taxpayer.

(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income

shall be allowed under Subsection (A) hereof for any payment made, directly orindirectly, to an official or employee of the national government, or to an official or

employee of any local government unit, or to an official or employee of a government-

owned or -controlled corporation, or to an official or employee or representative of a

foreign government, or to a private corporation, general professional partnership, or asimilar entity, if the payment constitutes a bribe or kickback.

(2) Expenses Allowable to Private Educational Institutions.- In addition to the expensesallowable as deductions under this Chapter, a private educational institution, referred to

under Section 27 (B) of this Code, may at its option elect either: (a) to deduct expendituresotherwise considered as capital outlays of depreciable assets incurred during the taxableyear for the expansion of school facilities or (b) to deduct allowance for depreciation thereof

under Subsection (F) hereof.

(B) Interest.-

(1) In General. - The amount of interest paid or incurred within a taxable year on

indebtedness in connection with the taxpayer's profession, trade or business shall be allowed

as deduction from gross income: Provided, however, That the taxpayer's otherwise

allowable deduction for interest expense shall be reduced by an amount equal to thefollowing percentages of the interest income subjected to final tax:

Forty-one percent (41%) beginning January 1, 1998;Thirty-nine percent (39%)beginning January 1, 1999; andThirty-eight percent (38%) beginning January 1, 2000;

(2) Exceptions.- No deduction shall be allowed in respect of interest under the succeedingsubparagraphs:


11/217

(a) If within the taxable year an individual taxpayer reporting income on the cash basis

incurs an indebtedness on which an interest is paid in advance through discount or

otherwise: Provided, That such interest shall be allowed a a deduction in the year theindebtedness is paid: Provided, further, That if the indebtedness is payable in periodic

amortizations, the amount of interest which corresponds to the amount of the principal

amortized or paid during the year shall be allowed as deduction in such taxable year;

(b)If both the taxpayer and the person to whom the payment has been made or is to be

made are persons specified under Section 36 (B); or

(c)If the indebtedness is incurred to finance petroleum exploration.

(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest

incurred to acquire property used in trade business or exercise of a profession may be

allowed as a deduction or treated as a capital expenditure.

(C) Taxes. -

(1) In General. - Taxes paid or incurred within the taxable year in connection with the

taxpayer's profession, trade or business, shall be allowed as deduction, except

(a) The income tax provided for under this Title;

(b) Income taxes imposed by authority of any foreign country; but this deduction shall

be allowed in the case of a taxpayer who does not signify in his return his desire to haveto any extent the benefits of paragraph (3) of this subsection (relating to credits for

taxes of foreign countries);

(c) Estate and donor's taxes; and

(d) Taxes assessed against local benefits of a kind tending to increase the value of the

property assessed.

Provided, That taxes allowed under this Subsection, when refunded or credited, shall be

included as part of gross income in the year of receipt to the extent of the income tax benefitof said deduction.

(2) Limitations on Deductions.- In the case of a nonresident alien individual engaged in

trade or business in the Philippines and a resident foreign corporation, the deductions fortaxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the

extent that they are connected with income from sources within the Philippines.

(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his

return his desire to have the benefits of this paragraph, the tax imposed by this Title shall becredited with:


12/217

(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of

a domestic corporation, the amount of income taxes paid or incurred during the taxable

year to any foreign country; and

(b) Partnerships and Estates. - In the case of any such individual who is a member of a

general professional partnership or a beneficiary of an estate or trust, his proportionateshare of such taxes of the general professional partnership or the estate or trust paid or

incurred during the taxable year to a foreign country, if his distributive share of the

income of such partnership or trust is reported for taxation under this Title.

An alien individual and a foreign corporation shall not be allowed the credits against the tax

for the taxes of foreign countries allowed under this paragraph.

(4) Limitations on Credit. - The amount of the credit taken under this Section shall be

subject to each of the following limitations:

(a) The amount of the credit in respect to the tax paid or incurred to any country shallnot exceed the same proportion of the tax against which such credit is taken, which thetaxpayer's taxable income from sources within such country under this Title bears to his

entire taxable income for the same taxable year; and

(b) The total amount of the credit shall not exceed the same proportion of the tax

against which such credit is taken, which the taxpayer's taxable income from sources

without the Philippines taxable under this Title bears to his entire taxable income for

the same taxable year.

(5) Adjustments on Payment of Incurred Taxes.- If accrued taxes when paid differ from

the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or inpart, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the

tax for the year or years affected, and the amount of tax due upon such redetermination, ifany, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the

amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of

such a tax incurred but not paid, the Commissioner as a condition precedent to the

allowance of this credit may require the taxpayer to give a bond with sureties satisfactory toand to be approved by the Commissioner in such sum as he may require, conditioned upon

the payment by the taxpayer of any amount of tax found due upon any such redetermination.

The bond herein prescribed shall contain such further conditions as the Commissioner may

require.

(6) Year in Which Credit Taken.- The credits provided for in Subsection (C)(3) of this

Section may, at the option of the taxpayer and irrespective of the method of accountingemployed in keeping his books, be taken in the year which the taxes of the foreign country

were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this

Section. If the taxpayer elects to take such credits in the year in which the taxes of theforeign country accrued, the credits for all subsequent years shall be taken upon the same


13/217

basis and no portion of any such taxes shall be allowed as a deduction in the same or any

succeeding year.

(7)Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed

only if the taxpayer establishes to the satisfaction of the Commissioner the following:

(a) The total amount of income derived from sources without the Philippines;

(b) The amount of income derived from each country, the tax paid or incurred to which

is claimed as a credit under said paragraph, such amount to be determined under rules

and regulations prescribed by the Secretary of Finance; and

(c) All other information necessary for the verification and computation of such credits.

(D) Losses. -

(1) In General. - Losses actually sustained during the taxable year and not compensated forby insurance or other forms of indemnity shall be allowed as deductions:

(a) If incurred in trade, profession or business;

(b) Of property connected with the trade, business or profession, if the loss arises fromfires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.

The Secretary of Finance, upon recommendation of the Commissioner, is herebyauthorized to promulgate rules and regulations prescribing, among other things, the

time and manner by which the taxpayer shall submit a declaration of loss sustained

from casualty or from robbery, theft or embezzlement during the taxable year:Provided, however, That the time limit to be so prescribed in the rules and regulationsshall not be less than thirty (30) days nor more than ninety (90) days from the date of

discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.

(c) No loss shall be allowed as a deduction under this Subsection if at the time of the

filing of the return, such loss has been claimed as a deduction for estate tax purposes in

the estate tax return.

(2) Proof of Loss.- In the case of a nonresident alien individual or foreign corporation, the

losses deductible shall be those actually sustained during the year incurred in business, trade

or exercise of a profession conducted within the Philippines, when such losses are notcompensated for by insurance or other forms of indemnity. The secretary of Finance, upon

recommendation of the Commissioner, is hereby authorized to promulgate rules andregulations prescribing, among other things, the time and manner by which the taxpayer

shall submit a declaration of loss sustained from casualty or from robbery, theft or

embezzlement during the taxable year: Provided, That the time to be so prescribed in therules and regulations shall not be less than thirty (30) days nor more than ninety (90) days


14/217

from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to

the loss; and

(3) Net Operating Loss Carry-Over.- The net operating loss of the business or enterprise

for any taxable year immediately preceding the current taxable year, which had not been

previously offset as deduction from gross income shall be carried over as a deduction fromgross income for the next three (3) consecutive taxable years immediately following the

year of such loss: Provided, however, That any net loss incurred in a taxable year during

which the taxpayer was exempt from income tax shall not be allowed as a deduction underthis Subsection: Provided, further, That a net operating loss carry-over shall be allowed only

if there has been no substantial change in the ownership of the business or enterprise in that

-

(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued

shares., if the business is in the name of a corporation, is held by or on behalf of the

same persons; or(ii) Not less than seventy-five percent (75%) of the paid up capital of

the corporation, if the business is in the name of a corporation, is held by or on behalfof the same persons.

"For purposes of this subsection, the term 'not operating loss' shall mean the excess of

allowable deduction over gross income of the business in a taxable year.

Provided, That for mines other than oil and gas wells, a net operating loss without the

benefit of incentives provided for under Executive Order No. 226, as amended, otherwise

known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) yearsof operation may be carried over as a deduction from taxable income for the next five (5)

years immediately following the year of such loss. The entire amount of the loss shall be

carried over to the first of the five (5) taxable years following the loss, and any portion ofsuch loss which exceeds, the taxable income of such first year shall be deducted in likemanner form the taxable income of the next remaining four (4) years.

(4) Capital Losses.-

(a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only tothe extent provided in Section 39.

(b) Securities Becoming worthless. - If securities as defined in Section 22 (T) becomeworthless during the taxable year and are capital assets, the loss resulting therefrom

shall, for purposes of this Title, be considered as a loss from the sale or exchange, on

the last day of such taxable year, of capital assets.

(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock or

securities as provided in Section 38.

(6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the

extent of the gains from such transactions.


15/217

(7) Abandonment Losses.-

(a) In the event a contract area where petroleum operations are undertaken is partiallyor wholly abandoned, all accumulated exploration and development expenditures

pertaining thereto shall be allowed as a deduction: Provided, That accumulated

expenditures incurred in that area prior to January 1, 1979 shall be allowed as adeduction only from any income derived from the same contract area. In all cases,

notices of abandonment shall be filed with the Commissioner.

(b) In case a producing well is subsequently abandoned, the unamortized costs thereof,

as well as the undepreciated costs of equipment directly used therein , shall be allowed

as a deduction in the year such well, equipment or facility is abandoned by the

contractor: Provided, That if such abandoned well is reentered and production isresumed, or if such equipment or facility is restored into service, the said costs shall be

included as part of gross income in the year of resumption or restoration and shall be

amortized or depreciated, as the case may be.

(E) Bad Debts.-

(1) In General.- Debts due to the taxpayer actually ascertained to be worthless and charged

off within the taxable year except those not connected with profession, trade or business andthose sustained in a transaction entered into between parties mentioned under Section 36 (B)of this Code: Provided, That recovery of bad debts previously allowed as deduction in the

preceding years shall be included as part of the gross income in the year of recovery to the

extent of the income tax benefit of said deduction.

(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are

ascertained to be worthless and charged off within the taxable year and are capital assets, theloss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company

incorporated under the laws of the Philippines a substantial part of whose business is the

receipt of deposits, for the purpose of this Title, be considered as a loss from the sale orexchange, on the last day of such taxable year, of capital assets.

(F) Depreciation.-

(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable

allowance for the exhaustion, wear and tear (including reasonable allowance forobsolescence) of property used in the trade or business. In the case of property held by one

person for life with remainder to another person, the deduction shall be computed as if the

life tenant were the absolute owner of the property and shall be allowed to the life tenant. In

the case of property held in trust, the allowable deduction shall be apportioned between theincome beneficiaries and the trustees in accordance with the pertinent provisions of the

instrument creating the trust, or in the absence of such provisions, on the basis of the trust

income allowable to each.


16/217

(2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in the

preceding paragraph shall include, but not limited to, an allowance computed in accordance

with rules and regulations prescribed by the Secretary of Finance, upon recommendation ofthe Commissioner, under any of the following methods:

(a) The straight-line method;(b) Declining-balance method, using a rate not exceedingtwice the rate which would have been used had the annual allowance been computed

under the method described in Subsection (F) (1);(c) The sum-of-the-years-digit

method; and(d) any other method which may be prescribed by the Secretary of Financeupon recommendation of the Commissioner.

(3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under

rules and regulations prescribed by the Secretary of Finance upon recommendation of theCommissioner, the taxpayer and the Commissioner have entered into an agreement in

writing specifically dealing with the useful life and rate of depreciation of any property, the

rate so agreed upon shall be binding on both the taxpayer and the national Government in

the absence of facts and circumstances not taken into consideration during the adoption ofsuch agreement. The responsibility of establishing the existence of such facts and

circumstances shall rest with the party initiating the modification. Any change in the agreedrate and useful life of the depreciable property as specified in the agreement shall not be

effective for taxable years prior to the taxable year in which notice in writing by certified

mail or registered mail is served by the party initiating such change to the other party to the

agreement:

Provided, however, that where the taxpayer has adopted such useful life and depreciation

rate for any depreciable and claimed the depreciation expenses as deduction from his grossincome, without any written objection on the part of the Commissioner or his duly

authorized representatives, the aforesaid useful life and depreciation rate so adopted by thetaxpayer for the aforesaid depreciable asset shall be considered binding for purposes of thisSubsection.

(4) Depreciation of Properties Used in Petroleum Operations. - An allowance fordepreciation in respect of all properties directly related to production of petroleum initially

placed in service in a taxable year shall be allowed under the straight-line or declining-

balance method of depreciation at the option of the service contractor.

However, if the service contractor initially elects the declining-balance method, it may at

any subsequent date, shift to the straight-line method.

The useful life of properties used in or related to production of petroleum shall be ten (10)

years of such shorter life as may be permitted by the Commissioner.

Properties not used directly in the production of petroleum shall be depreciated under the

straight-line method on the basis of an estimated useful life of five (5) years.


17/217

(5) Depreciation of Properties Used in Mining Operations. - an allowance for

depreciation in respect of all properties used in mining operations other than petroleum

operations, shall be computed as follows:

(a) At the normal rate of depreciation if the expected life is ten (10) years or less; or

(b) Depreciated over any number of years between five (5) years and the expected life

if the latter is more than ten (10) years, and the depreciation thereon allowed as

deduction from taxable income: Provided, That the contractor notifies theCommissioner at the beginning of the depreciation period which depreciation rate

allowed by this Section will be used.

(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or

Resident Foreign Corporations. - In the case of a nonresident alien individual engaged

in trade or business or resident foreign corporation, a reasonable allowance for thedeterioration of Property arising out of its use or employment or its non-use in the

business trade or profession shall be permitted only when such property is located inthe Philippines.

(G) Depletion of Oil and Gas Wells and Mines.-

(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for

depletion or amortization computed in accordance with the cost-depletion method shall be

granted under rules and regulations to be prescribed by the Secretary of finance, upon

recommendation of the Commissioner. Provided, That when the allowance for depletionshall equal the capital invested no further allowance shall be granted: Provided, further, That

after production in commercial quantities has commenced, certain intangible exploration

and development drilling costs: (a) shall be deductible in the year incurred if suchexpenditures are incurred for non-producing wells and/or mines, or (b) shall be deductible in

full in the year paid or incurred or at the election of the taxpayer, may be capitalized and

amortized if such expenditures incurred are for producing wells and/or mines in the samecontract area.

'Intangible costs in petroleum operations' refers to any cost incurred in petroleum operationswhich in itself has no salvage value and which is incidental to and necessary for the drilling

of wells and preparation of wells for the production of petroleum: Provided, That said costs

shall not pertain to the acquisition or improvement of property of a character subject to the

allowance for depreciation except that the allowances for depreciation on such propertyshall be deductible under this Subsection.

Any intangible exploration, drilling and development expenses allowed as a deduction incomputing taxable income during the year shall not be taken into consideration in

computing the adjusted cost basis for the purpose of computing allowable cost depletion.

(2) Election to Deduct Exploration and Development Expenditures. - In computing

taxable income from mining operations, the taxpayer may at his option, deduct exploration


18/217

and development expenditures accumulated as cost or adjusted basis for cost depletion as of

date of prospecting, as well as exploration and development expenditures paid or incurred

during the taxable year: Provided, That the amount deductible for exploration anddevelopment expenditures shall not exceed twenty-five percent (25%) of the net income

from mining operations computed without the benefit of any tax incentives under existing

laws. The actual exploration and development expenditures minus twenty-five percent(25%) of the net income from mining shall be carried forward to the succeeding years untilfully deducted.

The election by the taxpayer to deduct the exploration and development expenditures is

irrevocable and shall be binding in succeeding taxable years.

'Net income from mining operations', as used in this Subsection, shall mean gross incomefrom operations less 'allowable deductions' which are necessary or related to mining

operations. 'Allowable deductions' shall include mining, milling and marketing expenses,

and depreciation of properties directly used in the mining operations. This paragraph shall

not apply to expenditures for the acquisition or improvement of property of a characterwhich is subject to the allowance for depreciation.

In no case shall this paragraph apply with respect to amounts paid or incurred for the

exploration and development of oil and gas.

The term 'exploration expenditures' means expenditures paid or incurred for the purpose of

ascertaining the existence, location, extent or quality of any deposit of ore or other mineral,

and paid or incurred before the beginning of the development stage of the mine or deposit.

The term 'development expenditures' means expenditures paid or incurred during the

development stage of the mine or other natural deposits. The development stage of a mine orother natural deposit shall begin at the time when deposits of ore or other minerals are

shown to exist in sufficient commercial quantity and quality and shall end upon

commencement of actual commercial extraction.

(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien

individual or Foreign Corporation.- In the case of a nonresident alien individual engagedin trade or business in the Philippines or a resident foreign corporation, allowance for

depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be

authorized only in respect to oil and gas wells or mines located within the Philippines.

(H) Charitable and Other Contributions.-

(1) In General.- Contributions or gifts actually paid or made within the taxable year to, or

for the use of the Government of the Philippines or any of its agencies or any political

subdivision thereof exclusively for public purposes, or to accredited domestic corporation orassociations organized and operated exclusively for religious, charitable, scientific, youth

and sports development, cultural or educational purposes or for the rehabilitation of

veterans, or to social welfare institutions, or to non-government organizations, in accordance


19/217

with rules and regulations promulgated by the Secretary of finance, upon recommendation

of the Commissioner, no part of the net income of which inures to the benefit of any private

stockholder or individual in an amount not in excess of ten percent (10%) in the case of anindividual, and five percent (%) in the case of a corporation, of the taxpayer's taxable

income derived from trade, business or profession as computed without the benefit of this

and the following subparagraphs.

(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding

subparagraph, donations to the following institutions or entities shall be deductible in full;

(a) Donations to the Government. - Donations to the Government of the Philippines or

to any of its agencies or political subdivisions, including fully-owned government

corporations, exclusively to finance, to provide for, or to be used in undertaking priorityactivities in education, health, youth and sports development, human settlements,

science and culture, and in economic development according to a National Priority Plan

determined by the National Economic and Development Authority (NEDA), In

consultation with appropriate government agencies, including its regional developmentcouncils and private philantrophic persons and institutions: Provided, That any donation

which is made to the Government or to any of its agencies or political subdivisions notin accordance with the said annual priority plan shall be subject to the limitations

prescribed in paragraph (1) of this Subsection;

(b) Donations to Certain Foreign Institutions or International Organizations. - donations

to foreign institutions or international organizations which are fully deductible in

pursuance of or in compliance with agreements, treaties, or commitments entered into

by the Government of the Philippines and the foreign institutions or internationalorganizations or in pursuance of special laws;

(c) Donations to Accredited Nongovernment Organizations. - the term 'nongovernmentorganization' means a non profit domestic corporation:

(1) Organized and operated exclusively for scientific, research, educational, character-

building and youth and sports development, health, social welfare, cultural or charitable

purposes, or a combination thereof, no part of the net income of which inures to thebenefit of any private individual;

(2) Which, not later than the 15th day of the third month after the close of the

accredited nongovernment organizations taxable year in which contributions arereceived, makes utilization directly for the active conduct of the activities constituting

the purpose or function for which it is organized and operated, unless an extended

period is granted by the Secretary of Finance in accordance with the rules andregulations to be promulgated, upon recommendation of the Commissioner;

(3) The level of administrative expense of which shall, on an annual basis, conformwith the rules and regulations to be prescribed by the Secretary of Finance, upon


20/217

recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of

the total expenses; and

(4) The assets of which, in the even of dissolution, would be distributed to another

nonprofit domestic corporation organized for similar purpose or purposes, or to the

state for public purpose, or would be distributed by a court to another organization to beused in such manner as in the judgment of said court shall best accomplish the general

purpose for which the dissolved organization was organized.

Subject to such terms and conditions as may be prescribed by the Secretary of Finance,

the term 'utilization' means:

(i) Any amount in cash or in kind (including administrative expenses) paid or

utilized to accomplish one or more purposes for which the accredited

nongovernment organization was created or organized.(ii) Any amount paid toacquire an asset used (or held for use) directly in carrying out one or more

purposes for which the accredited nongovernment organization was created ororganized.

An amount set aside for a specific project which comes within one or more purposes of

the accredited nongovernment organization may be treated as a utilization, but only if atthe time such amount is set aside, the accredited nongovernment organization hasestablished to the satisfaction of the Commissioner that the amount will be paid for the

specific project within a period to be prescribed in rules and regulations to be

promulgated by the Secretary of Finance, upon recommendation of the Commissioner,but not to exceed five (5) years, and the project is one which can be better

accomplished by setting aside such amount than by immediate payment of funds.

(3) Valuation. - The amount of any charitable contribution of property other than money

shall be based on the acquisition cost of said property.

(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if

verified under the rules and regulations prescribed by the Secretary of Finance, upon

recommendation of the Commissioner.

(I) Research and Development. -

(1) In General.- a taxpayer may treat research or development expenditures which are paid

or incurred by him during the taxable year in connection with his trade, business orprofession as ordinary and necessary expenses which are not chargeable to capital account.The expenditures so treated shall be allowed as deduction during the taxable year when paid

or incurred.

(2) Amortization of Certain Research and Development Expenditures. - At the election

of the taxpayer and in accordance with the rules and regulations to be prescribed by the


21/217

Secretary of Finance, upon recommendation of the Commissioner, the following research

and development expenditures may be treated as deferred expenses:

(a) Paid or incurred by the taxpayer in connection with his trade, business or

profession;(b) Not treated as expenses under paragraph 91) hereof; and(c) Chargeable

to capital account but not chargeable to property of a character which is subject todepreciation or depletion.

In computing taxable income, such deferred expenses shall be allowed as deductionratably distributed over a period of not less than sixty (60) months as may be elected by

the taxpayer (beginning with the month in which the taxpayer first realizes benefits

from such expenditures).

The election provided by paragraph (2) hereof may be made for any taxable year

beginning after the effectivity of this Code, but only if made not later than the timeprescribed by law for filing the return for such taxable year. The method so elected, and

the period selected by the taxpayer, shall be adhered to in computing taxable income forthe taxable year for which the election is made and for all subsequent taxable years

unless with the approval of the Commissioner, a change to a different method isauthorized with respect to a part or all of such expenditures. The election shall not

apply to any expenditure paid or incurred during any taxable year for which the

taxpayer makes the election.

(3) Limitations on deduction.- This Subsection shall not apply to:

(a) Any expenditure for the acquisition or improvement of land, or for the improvement

of property to be used in connection with research and development of a character

which is subject to depreciation and depletion; and

(b) Any expenditure paid or incurred for the purpose of ascertaining the existence,location, extent, or quality of any deposit of ore or other mineral, including oil or gas.

(J) Pension Trusts.- An employer establishing or maintaining a pension trust to provide for thepayment of reasonable pensions to his employees shall be allowed as a deduction (in addition to

the contributions to such trust during the taxable year to cover the pension liability accruing

during the year, allowed as a deduction under Subsection (A) (1) of this Section ) a reasonable

amount transferred or paid into such trust during the taxable year in excess of such contributions,but only if such amount (1)has not theretofore been allowed as a deduction, and (2) is

apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in

which the transfer or payment is made.

(K) Additional Requirements for Deductibility of Certain Payments.- Any amount paid or

payable which is otherwise deductible from, or taken into account in computing gross income orfor which depreciation or amortization may be allowed under this Section, shall be allowed as a

deduction only if it is shown that the tax required to be deducted and withheld therefrom has


22/217

been paid to the Bureau of Internal Revenue in accordance with this Section 58 and 81 of this

Code.

(L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding

Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may

elect a standard deduction in an amount not exceeding ten percent (10%) of his gross income.Unless the taxpayer signifies in his return his intention to elect the optional standard deduction,

he shall be considered as having availed himself of the deductions allowed in the preceding

Subsections. Such election when made in the return shall be irrevocable for the taxable year forwhich the return is made: Provided, That an individual who is entitled to and claimed for the

optional standard deduction shall not be required to submit with his tax return such financial

statements otherwise required under this Code: Provided, further, That except when the

Commissioner otherwise permits, the said individual shall keep such records pertaining to hisgross income during the taxable year, as may be required by the rules and regulations

promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

(M) Premium Payments on Health and/or Hospitalization Insurance of an IndividualTaxpayer.- the amount of premiums not to exceed Two thousand four hundred pesos (P2,400)

per family or Two hundred pesos (P200) a month paid during the taxable year for health and/orhospitalization insurance taken by the taxpayer for himself, including his family, shall be

allowed as a deduction from his gross income: Provided, That said family has a gross income of

not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided,

finally, That in the case of married taxpayers, only the spouse claiming the additional exemptionfor dependents shall be entitled to this deduction.

Notwithstanding the provision of the preceding Subsections, The Secretary of Finance, uponrecommendation of the Commissioner, after a public hearing shall have been held for this

purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemizeddeductions under Subsections (A) to (J) of this Section: Provided, That for purposes ofdetermining such ceilings or limitations, the Secretary of Finance shall consider the following

factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each

particular industry; and (2)effects of inflation on expenditure levels: Provided, further, That noceilings shall further be imposed on items of expense already subject to ceilings under present

law.

SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -

(A) In General.- For purposes of determining the tax provided in Section 24 (A) of this Title,there shall be allowed a basic personal exemption as follows:

For single individual or married individual judicially decreed as legallyseparated with noqualified dependents P20,000For Head of Family P25,000For each married individual

P32,000

In the case of married individuals where only one of the spouses is deriving gross income, only

such spouse shall be allowed the personal exemption.


23/217

For purposes of this paragraph, the term 'head of family' means an unmarried or legally separated

man or woman with one or both parents, or with one or more brothers or sisters, or with one or

more legitimate, recognized natural or legally adopted children living with and dependent uponhim for their chief support, where such brothers or sisters or children are not more than twenty-

one (21) years of age, unmarried and not gainfully employed or where such children, brothers or

sisters, regardless of age are incapable of self-support because of mental or physical defect.

(B) Additional Exemption for Dependents.- There shall be allowed an additional exemption of

Eight thousand pesos (P8,000) for each dependent not exceeding four (4).

The additional exemption for dependent shall be claimed by only one of the spouses in the case

of married individuals.

In the case of legally separated spouses, additional exemptions may be claimed only by the

spouse who has custody of the child or children: Provided, That the total amount of additionalexemptions that may be claimed by both shall not exceed the maximum additional exemptions

herein allowed.

For purposes of this Subsection, a 'dependent' means a legitimate, illegitimate or legally adopted

child chiefly dependent upon and living with the taxpayer if such dependent is not more than

twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent,regardless of age, is incapable of self-support because of mental or physical defect.

(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as

defined above during the taxable year, the taxpayer may claim the corresponding additionalexemption, as the case may be, in full for such year.

If the taxpayer dies during the taxable year, his estate may still claim the personal and additionalexemptions for himself and his dependent(s) as if he died at the close of such year.

If the spouse or any of the dependents dies or if any of such dependents marries, becomes

twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer

may still claim the same exemptions as if the spouse or any of the dependents died, or as if suchdependents married, became twenty-one (21) years old or became gainfully employed at the

close of such year.

(D) Personal Exemption Allowable to Nonresident Alien Individual. - A nonresident alienindividual engaged in trade, business or in the exercise of a profession in the Philippines shall be

entitled to a personal exemption in the amount equal to the exemptions allowed in the income taxlaw in the country of which he is a subject - or citizen, to citizens of the Philippines not residingin such country, not to exceed the amount fixed in this Section as exemption for citizens or

resident of the Philippines: Provided, That said nonresident alien should file a true and accurate

return of the total income received by him from all sources in the Philippines, as required by thisTitle.


24/217

>

CHAPTER VII - ALLOWABLE DEDUCTIONS - B

SEC. 36. Items not Deductible.-

(A) General Rule. - In computing net income, no deduction shall in any case be allowed in

respect to -

(1) Personal, living or family expenses;

(2) Any amount paid out for new buildings or for permanent improvements, or betterments

made to increase the value of any property or estate;

This Subsection shall not apply to intangible drilling and development costs incurred inpetroleum operations which are deductible under Subsection (G) (1) of Section 34 of this

Code.

(3) Any amount expended in restoring property or in making good the exhaustion thereof for

which an allowance is or has been made; or

(4) Premiums paid on any life insurance policy covering the life of any officer or employee,

or of any person financially interested in any trade or business carried on by the taxpayer,individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such

policy.

(B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions

shall in any case be allowed in respect of losses from sales or exchanges of property directly or

indirectly -

(1) Between members of a family. For purposes of this paragraph, the family of an

individual shall include only his brothers and sisters (whether by the whole or half-blood),spouse, ancestors, and lineal descendants; or

(2) Except in the case of distributions in liquidation, between an individual and corporationmore than fifty percent (50%) in value of the outstanding stock of which is owned, directly

or indirectly, by or for such individual; or

(3) Except in the case of distributions in liquidation, between two corporations more than

fifty percent (50%) in value of the outstanding stock of which is owned, directly or

indirectly, by or for the same individual if either one of such corporations, with respect tothe taxable year of the corporation preceding the date of the sale of exchange was under the

law applicable to such taxable year, a personal holding company or a foreign personal

holding company;
http://www.bir.gov.ph/index.php/tax-code.html#outlinehttp://www.bir.gov.ph/index.php/tax-code.html#outlinehttp://www.bir.gov.ph/index.php/tax-code.html#outline


25/217

(4) Between the grantor and a fiduciary of any trust; or

(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust ifthe same person is a grantor with respect to each trust; or

(6) Between a fiduciary of a trust and beneficiary of such trust.

SEC. 37. Special Provisions Regarding Income and Deductions of Insurance Companies,

Whether Domestic or Foreign. -

(A) Special Deduction Allowed to Insurance Companies. - In the case of insurancecompanies, whether domestic or foreign doing business in the Philippines, the net additions, if

any, required by law to be made within the year to reserve funds and the sums other than

dividends paid within the year on policy and annuity contracts may be deducted from their gross

income: Provided, however, That the released reserve be treated as income for the year ofrelease.

(B) Mutual Insurance Companies. - In the case of mutual fire and mutual employers' liabilityand mutual workmen's compensation and mutual casualty insurance companies requiring their

members to make premium deposits to provide for losses and expenses, said companies shall not

return as income any portion of the premium deposits returned to their policyholders, but shallreturn as taxable income all income received by them from all other sources plus such portion of

the premium deposits as are retained by the companies for purposes other than the payment of

losses and expenses and reinsurance reserves.

(C) Mutual Marine Insurance Companies. - Mutual marine insurance companies shall include

in their return of gross income, gross premiums collected and received by them less amounts

paid to policyholders on account of premiums previously paid by them and interest paid uponthose amounts between the ascertainment and payment thereof.

(D)Assessment Insurance Companies.- Assessment insurance companies, whether domestic or

foreign, may deduct from their gross income the actual deposit of sums with the officers of the

Government of the Philippines pursuant to law, as additions to guarantee or reserve funds.

SEC. 38. Losses from Wash Sales of Stock or Securities. -

(A) In the case of any loss claimed to have been sustained from any sale or other disposition of

shares of stock or securities where it appears that within a period beginning thirty (30) days

before the date of such sale or disposition and ending thirty (30) days after such date, thetaxpayer has acquired (by purchase or by exchange upon which the entire amount of gain or loss

was recognized by law), or has entered into a contact or option so to acquire, substantially

identical stock or securities, then no deduction for the loss shall be allowed under Section 34unless the claim is made by a dealer in stock or securities and with respect to a transaction made

in the ordinary course of the business of such dealer.


26/217

(B) If the amount of stock or securities acquired (or covered by the contract or option to acquire)

is less than the amount of stock or securities sold or otherwise disposed of, then the particular

shares of stock or securities, the loss form the sale or other disposition of which is not deductible,shall be determined under rules and regulations prescribed by the Secretary of Finance, upon

recommendation of the Commissioner.

(C) If the amount of stock or securities acquired (or covered by the contract or option to acquire

which) resulted in the non-deductibility of the loss, shall be determined under rules and

regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

SEC. 39. Capital Gains and Losses. -

(A) Definitions.- As used in this Title -

(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whetheror not connected with his trade or business), but does not include stock in trade of the

taxpayer or other property of a kind which would properly be included in the inventory ofthe taxpayer if on hand at the close of the taxable year, or property held by the taxpayerprimarily for sale to customers in the ordinary course of his trade or business, or property

used in the trade or business, of a character which is subject to the allowance for

depreciation provided in Subsection (F) of Section 34; or real property used in trade orbusiness of the taxpayer.

(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales

or exchanges of capital assets over the losses from such sales or exchanges.

(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales

or exchanges of capital assets over the gains from such sales or exchanges.

(B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation, onlythe following percentages of the gain or loss recognized upon the sale or exchange of a capital

asset shall be taken into account in computing net capital gain, net capital loss, and net income:

(1)One hundred percent (100%) if the capital asset has been held for not more than twelve

(12) months; and

(2)Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;

(C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall beallowed only to the extent of the gains from such sales or exchanges. If a bank or trust company

incorporated under the laws of the Philippines, a substantial part of whose business is the receipt

of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtednessissued by any corporation (including one issued by a government or political subdivision

thereof), with interest coupons or in registered form, any loss resulting from such sale shall not

be subject to the foregoing limitation and shall not be included in determining the applicability ofsuch limitation to other losses.


27/217

(D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, sustains in any

taxable year a net capital loss, such loss (in an amount not in excess of the net income for such

year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of acapital asset held for not more than twelve (12) months.

(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the holder uponthe retirement of bonds, debentures, notes or certificates or other evidences of indebtedness

issued by any corporation (including those issued by a government or political subdivision

thereof) with interest coupons or in registered form, shall be considered as amounts received inexchange therefor.

(F) Gains or losses from Short Sales, Etc. - For purposes of this Title -

(1) Gains or losses from short sales of property shall be considered as gains or losses from

sales or exchanges of capital assets; and

(2) Gains or losses attributable to the failure to exercise privileges or options to buy or sellproperty shall be considered as capital gains or losses.

SEC. 40. Determination of Amount and Recognition of Gain or Loss. -

(A) Computation of Gain or Loss. - The gain from the sale or other disposition of property

shall be the excess of the amount realized therefrom over the basis or adjusted basis fordetermining gain, and the loss shall be the excess of the basis or adjusted basis for determining

loss over the amount realized. The amount realized from the sale or other disposition of property

shall be the sum of money received plus the fair market value of the property (other than money)

received;

(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The basis of

property shall be -

(1) The cost thereof in the case of property acquired on or after March 1, 1913, if such

property was acquired by purchase; or

(2) The fair market price or value as of the date of acquisition, if the same was acquired byinheritance; or

(3) If the property was acquired by gift, the basis shall be the same as if it would be in the

hands of the donor or the last preceding owner by whom it was not acquired by gift, exceptthat if such basis is greater than the fair market value of the property at the time of the gift

then, for the purpose of determining loss, the basis shall be such fair market value; or

(4) If the property was acquired for less than an adequate consideration in money or money's

worth, the basis of such property is the amount paid by the transferee for the property; or


28/217

(5) The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a

transaction where gain or loss is not recognized under paragraph (C)(2) of this Section.

(C) Exchange of Property. -

(1) General Rule. - Except as herein provided, upon the sale or exchange or property, theentire amount of the gain or loss, as the case may be, shall be recognized.

(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or

consolidation -

(a) A corporation, which is a party to a merger or consolidation, exchanges property

solely for stock in a corporation, which is a party to the merger or consolidation; or

(b) A shareholder exchanges stock in a corporation, which is a party to the merger or

consolidation, solely for the stock of another corporation also a party to the merger or

consolidation; or

(c) A security holder of a corporation, which is a party to the merger or consolidation,

exchanges his securities in such corporation, solely for stock or securities in suchcorporation, a party to the merger or consolidation.

No gain or loss shall also be recognized if property is transferred to a corporation by aperson in exchange for stock or unit of participation in such a corporation of which as a

result of such exchange said person, alone or together with others, not exceeding four(4) persons, gains control of said corporation: Provided, That stocks issued for services

shall not be considered as issued in return for property.

(3) Exchange Not Solely in Kind. -

(a) If, in connection with an exchange described in the above exceptions, an individual,

a shareholder, a security holder or a corporation receives not only stock or securitiespermitted to be received without the recognition of gain or loss, but also money and/or

property, the gain, if any, but not the loss, shall be recognized but in an amount not in

excess of the sum of the money and fair market value of such other property received:Provided, That as to the shareholder, if the money and/or other property received has

the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the

shareholder an amount of the gain recognized not in excess of his proportionate share

of the undistributed earnings and profits of the corporation; the remainder, if any, of thegain recognized shall be treated as a capital gain.

(b) If, in connection with the exchange described in the above exceptions, the transferorcorporation receives not only stock permitted to be received without the recognition of

gain or loss but also money and/or other property, then (i) if the corporation receiving

such money and/or other property distributes it in pursuance of the plan of merger orconsolidation, no gain to the corporation shall be recognized from the exchange, but (ii)


29/217

if the corporation receiving such other property and/or money does not distribute it in

pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to the

corporation shall be recognized but in an amount not in excess of the sum of suchmoney and the fair market value of such other property so received, which is not

distributed.

(4) Assumption of Liability. -

(a) If the taxpayer, in connection with the exchanges described in the foregoingexceptions, receives stock or securities which would be permitted to be received

without the recognition of the gain if it were the sole consideration, and as part of the

consideration, another party to the exchange assumes a liability of the taxpayer, or

acquires from the taxpayer property, subject to a liability, then such assumption oracquisition shall not be treated as money and/or other property, and shall not prevent

the exchange from being within the exceptions.

(b) If the amount of the liabilities assumed plus the amount of the liabilities to whichthe property is subject exceed the total of the adjusted basis of the property transferred

pursuant to such exchange, then such excess shall be considered as a gain from the saleor exchange of a capital asset or of property which is not a capital asset, as the case may

be.

(5) Basis -

(a) The basis of the stock or securities received by the transferor upon the exchangespecified in the above exception shall be the same as the basis of the property, stock or

securities exchanged, decreased by (1) the money received, and (2) the fair market

value of the other property received, and increased by (a) the amount treated asdividend of the shareholder and (b) the amount of any gain that was recognized on the

exchange: Provided, That the property received as 'boot' shall have as basis its fair

market value: Provided, further, That if as part of the consideration to the transferor, thetransferee of property assumes a liability of the transferor or acquires form the latter

property subject to a liability, such assumption or acquisition (in the amount of

Title i Organization and Function of the Bureau of Internal Revenue

Documents

Transcript of Title i Organization and Function of the Bureau of Internal Revenue